Client segmentation for financial advisors
Charles Paikert

By: Charles Paikert on March 30th, 2021

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Client segmentation for financial advisors

CRM  |  Financial Advisors  |  Wealth Management  |  Investment Advisors

Client segmentation can dramatically enhance an RIA’s efficiency, profitability, growth and client satisfaction.

In this first of a three-part series, I examine why firms should consider segmenting clients into different tiers and how to implement this discipline. In part two, I will explore the criteria used to segment clients and how the practice can broaden an RIA’s target market. And part three will include the challenges the practice poses and some practical Dos and Don’ts for optimal execution.

Why should advisors consider client segmentation?

Client segmentation divides clients into different tiers, established by a set of criteria that best matches the extent of services offered with the client’s value to the firm.

A recent Fidelity Investments research study, “Segment for Success,” found that firms that segment their client base had more assets under management, growth in AUM and many clients with $1 million or more than those firms that didn’t segment.

“Segmenting provides an objective measure of how to profitably serve clients, regardless of size or revenue model,” says Lisa Crafford, vice president, platform strategy and consulting for advisor solutions at BNY Mellon’s Pershing. “It also allows firms to stay ahead of talent needs, such as when and who to hire, by tracking growth and understanding how many hours it takes to serve each segment.”

A better understanding of client economics is another key benefit of segmenting, according to Eliza DePardo, the co-founder and former director of the consulting and research firm FA Insights.

“Understanding how client type contributes to your firm’s financial performance is a critical factor in helping to shape a client base over the years ahead,” says DePardo, who now heads her own consulting firm. “It’s also a foundational step to support the right mix of services and pricing by segment to ensure profitability.”

What’s more, segmentation can help sharpen a niche market strategy, she says. “You have a better understanding of how profitable your niche market is and can better allocate resources to the markets that have the greatest potential.”

Indeed, the 2020 FA Insight Growth by Design study showed that firms that can adhere to their niche market strategy (50% or more clients met target market criteria) achieved a greater operating profit margin and growth rate than those that didn’t.

Segmenting has helped High Note Wealth in suburban Minneapolis by identifying where the firm is profitable and who it should prospecting to, says Michael Forrester, president and CIO of the RIA. “You also see what you are giving and to who. Based on the value of the relationship, you can see if you are overdoing it or under doing it.”

Identifying the most appropriate client groups also helps firms better customize their service offering to give clients a more personalized experience, a key competitive differentiator.

How are RIAs implementing client segmentation?

Advisors need to define their ideal client and spend time and resources on finding the clients who fit that profile and match services with client needs to align with the value they provide the firm.

The most commonly used criteria for segmentation has traditionally been a client’s assets under management and the revenue those assets generate for the firm.

RIAs then determine what will — and won’t — be done for the different segments: what services are offered, at what cost, who delivers them and how they are delivered.

Clients who have a lower level of assets in a firm and do not generate substantial revenue, for example, might be charged for financial planning services on an hourly, as-needed basis. In contrast, clients with more assets are charged a flat retainer fee for the same services. The most profitable clients may be given planning advice as part of an overall fee for no extra charge.

Service allocation may also be differentiated. Clients on a “C” tier may work with a junior advisor, while “B” tier clients will be assigned a more senior wealth manager and an “A” client has access to a partner.

Time spent on meetings may be another area where firms can better match the allocation of resources to the client’s value. A “C” level client, for example, may receive a limited number of in-person review meetings, while “B” level clients receive more and “A” level clients have unlimited access to the firm’s advisors.

High Note Wealth tries to match client service needs to “operational complexity,” says Forrester.  “The service model is driven by touchpoints,” Forrester explains. “The top tier, for example, may get 20 touchpoints in a given period, while the mid-level tier gets 16 and the lower tier gets 12.”

RIAs are increasingly employing a wide range of criteria beyond AUM for segmenting clients, which I will discuss later in part two of this series.

But no matter what criteria is selected, advisory firms must collect quality data to segment clients effectively. Data should come from various sources, including personal relationships, emails, questionnaires and routine paperwork. Every data point helps — even the clients’ food, travel and sports preferences, hobbies and favorite charities.

Many wealth managers are now using sophisticated data analytics to examine client risk profiles, interactions with advisors, fee structures and profit margins.

The data must be automated, ideally in a high-quality CRM (client relationship management) system. Integrating personal and portfolio data in a centralized system enables advisors to have a holistic and up-to-the-minute client profile, allowing them to tailor segmented services accordingly.

Firms should create a “service matrix,” Pershing’s Crafford says, to understand what they will do, who will do it, and how often they will do it. That, in turn, will help RIAs “determine capacity, profitability, costs and which clients belong in which segment.”


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About Charles Paikert

Charles Paikert has been writing about the financial advisory industry since 2004. Paikert has been an editor for Investment News and Financial Planning and currently contributes to Family Wealth Report, RIABiz and Barron’s. He has also written about the industry for The New York Times and Reuters and has moderated panels at numerous industry conferences, including Schwab IMPACT and Invest. Paikert is the co-author of Madness: The Ten Most Memorable NCAA Basketball Finals.